P's front-month series of puts takes center stage in the options pits

Pandora Media Inc (NYSE:P - 10.00) seems to be caught in the bearish trading crosshairs today, as nearly 5,000 puts have crossed the tape so far. This is roughly double the equity's expected intraday put volume, and more than three times the number of calls exchanged. P's front-month series of options seems to be getting the most action, with nearly 4,400 contracts trading at the January 2013 10-strike put -- the bulk of them at the ask price, pointing to buyer-driven activity.

According to Trade-Alert, these puts changed hands at a volume-weighted average price (VWAP) of $0.55. With today's volume exceeding current open interest levels -- and implied volatility last seen 3.6 percentage points higher -- it can be assumed that new positions are being added here. By purchasing these puts to open, speculators are counting on the shares to fall south of breakeven at $9.45 (strike price less the VWAP) by Jan. 18, when front-month options expire at the close.

Today's uptick in P put activity is a deviation from the norm. In fact, the security's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio checks in at 3.19, indicating calls bought to open have more than tripled puts during the past 10 weeks. This ratio ranks higher than 70% of other such readings taken within the last 12 months, meaning traders have been scooping up calls over puts at an accelerated clip.

However, not all of this buy-to-open call volume may be of the strictly bullish variety. Short interest on the Internet radio darling spiked by roughly 16% during the most recent reporting period, and now represents a hefty 32% of P's available float. This raises the possibility that short sellers have been purchasing calls to hedge their pessimistic positions. Either way, it would take more than four days to unwind these shorted shares, at the stock's average pace of trading.

From a technical standpoint, P has shed around 5% during the past year. However, the shares have gained some recent momentum, recovering more than 41% since touching a record low of $7.08 on Nov. 16. Should the equity continue to blaze a steady path higher in the near term, today's bears could end up running for the exits ahead of January expiration.